5 money moves a post-bubble buyer is making now

Bargain-hunting investor Soo Chuen Tan expects cheaper stocks

SAN FRANCISCO (MarketWatch) — Financial market dislocations are not pretty, but to cool-headed buyers they are beautiful.

Dislocation is a polite way of describing a painful market breach, and the resulting upheaval spurs value investor Soo Chuen Tan into action. Dislocation is chaotic, but lost in the smoke and dust are quality assets that panicked investors have left behind — assets priced to sell that Tan is happy to consider buying.

So into the fire-sale he runs. Discerene Value Advisors in Stamford, Conn., where Tan is a managing member, typically invests under adverse conditions that send most competitors packing.

Tan’s strategy, employed for endowments, foundations and wealthy families: Buy at a deep discount to estimates of a company’s fair value, concentrate the portfolio, and hold for the long term.

“Opportunities to make fortunes usually come in times of greatest dislocation,” Tan says. “You can train yourself to look for dislocations and read all the material on value investing and see the returns one can get if one invests at points of maximum pessimism.”

“But that only takes you part of the way,” Tan adds. “An important element of value investing is psychological temperament. You either ‘get’ it in your gut, or you don’t. When you read a headline about Greece blowing up, do you think, ‘Where’s my cash, and can I move it to a safer bank account?’ Or do you say ‘When’s the next plane out to Athens?’”

Investors should watch for opportunities in the world’s most troubled areas, Tan says, but for now, he’s treading carefully:

1. Be cautious about U.S. stocks

The U.S. and Europe are separated by a printing press, Tan says.

The ability of the Treasury to print dollars
DXY, +0.52%
has lifted U.S. economic growth, but Tan says he worries about the long-term effects to the health of the U.S. economy — even beyond the so-called fiscal cliff that dominates the headlines.

“The U.S. has very intractable problems,” Tan notes. “You have states with huge deficits, an aging population, the fiscal cliff, high unemployment, high budget deficits. You have real problems, and it’s not obvious what the solutions are.”

“Invest carefully and look for specific opportunities,” Tan suggests. And, he adds, channel Warren Buffett’s advice to be greedy when others are fearful and fearful when others are greedy.

That strategy makes logical sense — just not at any price, he explains. “No matter how good the business is,” Tan says, “you do not protect capital when you overpay.”

3. Be careful with emerging-markets investments

Optimism about emerging markets also troubles Tan. Here again is a well-known theme — expectations for the superior growth prospects of the world’s developing nations, and the prices investors build into that assumption.

Soo Chuen Tan

“I’m Malaysian,” Tan says. “I’m far less sanguine about the world gravitating to or being on this inexorable march toward looking like the United States.”

Indeed, American investors look at emerging markets through something of a “rose-tinted lens,” Tan says. “You can’t expect countries to grow at 5%, 6%, 7%, 8% for years at a time without going rough cycles.”

Moreover, business practices in emerging markets aren’t always on the same level as in the U.S. and other developed markets, Tan says. Among his concerns: corporate governance; management talent; the cost of doing business; and honesty and transparency.

Says Tan: “You’re dealing not necessarily with free markets — you’re dealing with rigged markets with high transaction costs. Capital doesn’t always find the best opportunity, and minority shareholders might not get the benefit.”

“I want giant margins of safety, and valuations are not at levels where I’m jumping up and down,” he says. Tan adds that he’s not sure if shares will decline to his buy point, but it’s a chance he’ll take.

“If we don’t get the valuations we want, we just don’t invest,” Tan says. “You want to buy when even in very stressed scenarios you do OK. I’m not sure — Greece excluded — that we’re there yet.”

5. Consider Greece and other unloved markets

In fact, Greece appeals to Tan’s value sensibilities. But he’s not one to take the relatively safer road of buying Greek debt or shares of Greek exporters that don’t have much domestic exposure.

Instead, Tan says, “it’s more interesting to go into the muck.”

In Greece and elsewhere, he looks for companies “that are experiencing stresses to their business but are resilient enough to survive the difficulties.”

Sectors on his global radar include utilities, consumer-staples producers and providers of basic industrial needs, rather than financial-services firms.

And then, Tan says he would buy shares only at sizable discounts — a comfort level reached partly by answering a question that a deep-value investor like Tan says is key: “Does the company have a reason to exist?”

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